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A Downturn That Costs Jobs Could Catch the U.S. Unprepared

More than half of states lack enough unemployment funding for a recession

State unemployment funds have picked up during the recovery, thanks to low jobless rates, but many states have failed to rebuild funds sufficient to pay benefits at a recession level for a year.
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Caitlin Ochs/Bloomberg News

In 2009, mired in the depths of recession, Ohio’s unemployment trust fund went broke, prompting the state to borrow $2.6 billion from the federal government so it could keep sending checks to unemployed workers.

Now, with the state unemployment rate down to 4.4%, the debt has been repaid and the trust fund has started to rebuild, but not enough to leave Ohio with sufficient funds to manage another economic downturn.

That challenge exists across the country: Low unemployment has led to a recovery in state unemployment funds, but the recovery is mixed and incomplete. State unemployment trust fund reserves hit $55.2 billion last year, up substantially from $9.5 billion in 2010. Despite the rebound, more than half of U.S. states lack enough unemployment funding to be prepared for another recession, Labor Department data show.

Economists and policy experts say many states—including powerhouses like New York, California and Texas—are missing an opportunity to rebuild their funding during good economic times. Complicating their outlook, the federal government may not be in a strong position to help the next time the U.S. economy goes south, because federal budget deficits are approaching $1 trillion.

“Given how robust the recovery has been, this is a high number of states to not be meeting the recommended federal solvency measure,” said George Wentworth, senior counsel at National Employment Law Project, a group that advocates for the unemployed. “When there is another recession these systems are going to…provide considerably less economic security.”

For a trust fund to be recession-ready, it must have enough in reserve to pay out benefits at a recession level for a year. As of the beginning of 2018, 24 states and jurisdictions including Washington, D.C. and Puerto Rico exceeded this standard, while 29 states and territories including the Virgin Islands fell below it, according to a Labor Department report.

By comparison, in 2000, when the national unemployment rate matched today’s 4.1%, 30 states met the solvency standard.

In the majority of states, trust fund money derives from taxes on employers, with a few states requiring employee contributions. If states run out of funds, the federal government typically provides a backstop.

State trust funds owed $47 billion to the federal government in 2011, according to a Century Foundation paper by Andrew Stettner. By the end of 2017 their debt had been reduced to about $1 billion.

To pay back the federal government and recover funding, states have pursued different strategies. Nine states reduced the duration of benefits to fewer than the traditional 26 weeks.

North Carolina is among those nine. The cuts might have helped to encourage individuals to find work. In the second quarter of 2017, the percentage of workers claiming unemployment benefits was lower in North Carolina than in any other state. The average weekly benefit was $252, 46th in the nation.

The state’s fund is now big enough to make payouts through a recession, but some policy experts say cutting benefits will come with costs. During a recession, the duration of benefits and average payment could prove insufficient to cover a wide swath of unemployed workers.

“If there is a tremendous economic downturn, it will not provide the assistance to the families or have a stabilizing role,” said Bill Rowe, deputy director of advocacy at the North Carolina Justice Center, an organization aimed at alleviating poverty.

States figuring out how to address low funding levels are faced with limited options that often boil down to how much to cut worker benefits or raise employer taxes.

That debate is still playing out in Ohio.

For Steve Bruns, president of Ohio-based Bruns General Contracting, part of the legislative solution lies in limiting the length of worker benefits. He hopes the state can bring the fund back to solvency, as taxation scars from the last recession still linger.

Mr. Bruns’s construction company was paying nearly three times as much in taxes per employee to the state in the wake of the recession, as Ohio paid off debt to the federal government. The firm cut costs on energy, employee perks and building operations as a result of recessionary pressures exacerbated by the extra taxation, he said.

“We were scrambling trying to figure out how to make ends meet,” Mr. Bruns said. “(The taxation) was just another burden you had to deal with.”

“Everyone recognized the system was not adequately funded but kept kicking the can down the road because no one wanted to do the heavy-lifting to actually fix the problem,” said Don Boyd, director of labor and legal affairs at the Ohio Chamber of Commerce, of the prerecession days.

“I don’t think we’ve done an adequate job of addressing the issue to try and make sure we have enough in our trust fund to weather the next storm.”

A spokesman for the Ohio Department of Job and Family Services declined to comment.